What's going on?

The US Federal Reserve (�the Fed�) indicated at its meeting on Wednesday that it wasn�t concerned about the apparent recent blip in US economic growth. Investors interpreted that to mean that another interest rate increase is coming soon…

What does this mean?

Data on the US economy has become marginally less positive in recent weeks with some influential indicators suggesting that economic growth is slowing. However, the Fed said on Wednesday that it thinks any softness is temporary. It pointed to strength in the job market and improving business investment (e.g. buying equipment) as reasons to be optimistic.


Investors took this to mean that the Fed is more likely to be confident enough in the economy to raise its target interest rate at its June meeting (remember, higher interest rates create a headwind for economic growth, and so the Fed wants to be confident that the economy can withstand that before it raises its target interest rate further).

Why should I care?

The bigger picture: Let�s hope the Fed is correct!

In addition to a few signs that economic growth is weakening, prices (excluding commodity-linked things like fuel) declined in March versus the previous month, a sign that activity may be slower than thought (as prices tend to go up when people and businesses are buying things). An improvement in the data in the coming weeks would help convince investors that the Fed is right.


For markets: Interest rates matter, but so does the Fed�s bond buying policy.

In the years following the financial crisis, the Fed bought huge amounts of investments on the open market, including US government bonds, to try to boost the economy (click here for background on that). Now that the economy is healthier, the Fed wants to reverse this action. By selling bonds, the Fed would put upward pressure on interest rates (how? click here). The Fed has promised more details on its plan at some stage this year, and investors are eagerly awaiting them.